Five Reasons Why Major Labels Didn’t Actually Blow It With Napster
Popular opinion tends to suggest that the major labels screwed up when they opted to sue Napster, rather than hammering out a deal with them. Looking at it from the perspective of major labels circa 2000 however, reveals that they may have made the best call possible.
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Guest Post by Jim McDermott on Trickness
For a long time, pundits have been saying that the major music labels blew it by suing Napster instead of doing a deal with them. It's as though they're obligated to repeat this like a mantra; the labels didn't get it, they were clueless, they were asleep, how could they have missed such a golden opportunity, yadda yadda. Sift through all the reverential twaddle that's written about Napster, and you'd think they walked into the major labels offering trays of gold and precious gems but were rebuffed.
These pundits weren't there when Napster was going down, so to a degree they can be excused for not understanding all the complexities that were in play at the time. But increasingly, I've noticed a trend amongst former colleagues, people who worked at majors during the dawn of Napster and saw the rise of file sharing, people who should know better, saying we blew it with Napster too. Could be they've read so many articles spouting this opinion that they've adopted it themselves. Or maybe they say it because they don't want to seem, you know, unhip.
Whatever the reason, it's bullshit. The major labels were right not to compromise with Napster. I was VP of Electronic Music Distribution at Sony Music at the time, dealing with these issues day to day. Understandably, some people may think, what does it matter if the majors were right or not? They lost. But I think its important to understand the various facets and history of these events, if only to provide perspective for issues the industry is still dealing with today. So, at the risk of being unhip, here are Five Reasons Why The Major Labels Didn't Blow It With Napster.
1) The Economics Sucked: Here we are in 2015; Spotify, Pandora and other streaming services are struggling to become profitable. Artists complain how little they're being paid, and consumers seem unwilling to pay more than $9.99 a month. It's clear that selling music profitably, even all you can eat access that's totally portable and personalized via widespread adoption of mobile devices, is difficult.
Now let's look at things from the perspective of a major label in 2000. CD sales have contracted a bit, marketing costs are rising, but the music business has bounced back from 
economic challenges many times. The music business in all facets is cyclical. CD sales generate over 13 billion dollars in 2000; via an ecosystem that, despite flaws, is working fairly well. Artists are getting signed, records made, distributed, marketed, put on the radio, and sold. There is not only a perception that music has value, it is the reality. Then along comes Napster. Napster's play is that their distribution network has par or greater value than the content, and that a nominal monthly fee ($10-20) is what the consumer would tolerate. This fee would be split between Napster and the labels.
Now, Napster didn't approach labels to get licenses before they launched, they just put their software out there. Major labels were not in the habit of giving anyone licenses for unlimited replication and distribution of their masters, which is what Napster enabled, again, without consent by the rights holders. If you could even put a number on what such a license might be valued at by a major label in 2000, it would certainly be in the billions of dollars (because remember, 13 billion dollars worth of CDs, a tangible, countable product, were being sold annually at that time.)
So here are these Napster guys, sitting across from you in a meeting, saying "let's make a deal, we'll give you ten bucks a month per user, and hey, if you don't do a deal with us, we'll keep doing this anyway, because (smirk smirk), "fair use" enables us to do so." Honestly, why would anyone do a deal under these circumstances? You're got 13 billion dollars in revenue on one hand, and on the other a couple of guys politely extorting you to settle for ten bucks a month per user. NO WAY was that going to be a deal that happened in 2000; it's not even a deal that makes sense today.
2) LOTS of Experimentation Was Happening: There's a perception that the music industry did nothing but sue people during the Napster years, and that it wasn't until Steve Jobs pushed the majors to license iTunes that anything got done. This is not correct, I know so because I was there and involved. The Madison Project was an experiment some of the majors did with
Roadrunner cable in San Diego to test the viability of consumers buying, downloading and burning their own CDs. And this 1999 year end review in Billboard Magazine details a bunch of other projects and digital licensing deals that were happening at the time. At Sony Music, we were working with Liquid Audio, A2B, RioPort, Microsoft, Real Networks, Intertrust, Launch, and many others. In 1999/2000, Apple wasn't really a player in digital music. It barely made sense to talk to them because they had no audience for music; the only presence Apple had at this time was when startup guys bought their pretty Powerbooks into meetings. Nobody was waiting for Apple to come along and save digital music (they had to buy SoundJam MP first anyway). Everyone was learning, but we had a responsibility to minimize mistakes while we learned. Rushing into a deal with Napster would have rendered all other efforts to develop a legitimate digital music marketplace stillborn – and frankly, it would have made the future success of the iTunes Music store literally impossible. Had a deal been done with Napster, iTunes would have looked radically different, if it existed at all.
3) The Responsibility to Artists & Stakeholders: Ahh, that word, responsibility. Napster was never burdened by that word. They couldn't even promise they'd be able to say what tracks and which artists were downloaded on their service, because for one, the consumers were creating the metadata associated with those tracks when they uploaded them. Napster didn't have to concern themselves with getting publishing clearances from all the songwriters of a given track, or mechanical rights fees, or locating the film for the album artwork, or making sure the digital masters they uploaded had no artifacts – they didn't care, and neither did the users of Napster, because it was all free. A label has a responsibility to the artists and their art, the rights holders, and yeah, to the retailers who are selling legitimate music products. We couldn't wake up one day and say, OK Napster, you've got a GREAT idea, screw all those agreements, all that legacy and stewardship!
Invariably, people point out that labels exploited artists for years, and use that as some rationalization for file sharing. But all it really means is that Napster made it easy for the fans to screw the artists too, and a few entrepreneurs got really rich instead of label guys. You can't support Napster by claiming some moral high ground.
4) The Genie Was Never Going To Get Back In The Bottle: It is wildly naive to think that doing a deal with Napster would have somehow contained file sharing. All you need to do is look at the decade following Napster's demise and see that it was replaced by a never ending variety of peer-to-peer players, including services like Limewire and The Pirate Bay. Signing a deal with Napster, which would have turned it into a paid peer-to-peer service, would have instantly created a market for competing free (or ad-based) services. People get very philosophical about what Napster did to the marketplace, and the opportunities it created. But all it really proved was that all the music you can download for free with no consequences had great appeal. Once people got charged a fee, or got sued, they'd go elsewhere for their free music. Napster was never going to be an answer to anything, just the first in a long line of questions we're still pondering today.
5) Legal Precedents Had To Be Established: I heard it in meetings many times – "we can't do any deal with Napster until the court case is resolved and we have legal precedent on file 
sharing." In the early 2000's in the USA, majors were either licensing content to digital music services, or developing their own. If it was found that file sharing was "fair use", as Napster argued, then the digital music marketplace would be dead overnight. Napster was available from June 1999 until July 2001 when it was ordered closed, just two years. But that was a very long period of "foundational erosion" for anyone trying to build a legitimate download marketplace to endure. It cannot be overstated how important it was to assert legally that the majors owned the digital distribution rights of their masters, and that file sharing was not "fair use". That had to happen before any compromise could be considered.
Outside of America, the digital download marketplace was evolving a little bit slower; internet media consumption was limited due to bandwidth constraints, and some markets were more enthusiastic about mobile. It wasn't certain that existing artist contracts included rights for digital downloads and streaming in all territories; in 2000, we had a whiteboard of tracks cleared for download sale in the USA, and for months it was just 80 songs – and Sony Music had a catalog of millions of tracks. So it wasn't just about establishing legal precedent about fair use and file sharing, it was about labels proactively confirming their rights by actively exploiting/licensing them. This took time, which became compressed because of Napster's arrival.
OK, here's a bonus 6th reason :-) Just Because You Lose, It Doesn't Mean You Did The Wrong Thing Fighting The Battle. Sometimes in life, you fight battles that end up being futile. Nobody wins all the time. But that doesn't mean that fighting wasn't the right thing to do just because you lost. In a December 2014 video piece from the New York Times, one of the original developers who worked on Napster recalls thinking, "If this piece of code works, this is going to be huge. And I had a moment there where I asked myself, is this morally correct? Technology's advancing, this is going to happen anyway." And of course, they launched Napster and it became huge. So you've got premeditation, prior knowledge of wrongdoing, an understanding that this would hurt someone – but they did it anyway.
There's an old adage, and it applies all too often in the growth of giant digital media players: if you're going to steal, steal big. Boost a $1000's worth CDs and get caught, you could do four years in jail. Bootleg CD and record plants routinely got raided in the physical product days, product confiscated and arrests made. But Napster facilitated the theft of billions of dollars of intellectual property, and nobody really got punished. Well, certainly not the guys who created and ran Napster; although, quite a few music fans who used the service and got caught file sharing suffered hefty fines.
Obviously file sharing didn't go away when Napster was shut down, and a segment of people still get music, movies and software this way. But file sharing didn't end up being predominant way music gets consumed. The legal download business blossomed for a time, and now streaming is where things are happening – with licensing fees potentially headed upwards. So perhaps we didn't "lose" the battle after all.
Napster really only proved that many people love free music, and if you enable them to steal something without feeling like they're doing anything wrong, they'll do it without qualms. These facts are nothing to build a business on, or get nostalgic about. No matter how hip it may be to do so.
If you made it this far – thanks for reading!
Jim McDermott
(note, these are just my opinions.)
Jim McDermott is a writer and social media/content marketing consultant who has worked in digital music since 1994. His label experience includes stints at Sony, Warner, Universal, Island Records and PolyGram, and he continues to create and execute online marketing strategies for both popular and developing artists. Follow Jim on twitter at @thetrickness
Jim: This is an excellent piece and does eradicate some misconceptions I might have held. However, a lot of people in prominent positions did themselves (and ultimately, the industry) no favors by keeping their collective heads buried in the sand well into the 2000s. I remember hearing bigwigs with major labels, and multiplatinum artists, and boatloads of other people on down the line even to my own friends who would argue with me, all making the same claim that digital online music sales were never going to “take off” and that it was somehow going to magically revert back to a predominant CD buying culture again. I mean you reference the 2 years Napster was able to raid the cupboards unfettered while the legal system debated the matter, and you’re right, this is a “very long period” for them to erode the market unchecked. So long in fact that you’d have thought every major label would have had plenty of time to get its own legitimate facsimile up and running, allowing users to download legally obtained content for a reasonable fee. Am I wrong in making the observation that none of the major labels got their own sites up and running with this capability during that time frame? I’m pretty sure that’s the case, and this just seems mind blowing to me. You’d have thought rights holders would have been tripping over themselves to get this in place and stem the tide. Instead you’ve got Metallica suing its fans and the handful who attempt to break off and confront this new paradigm being laughed out of the building. It was just a very shortsighted mindset across the industry and I feel like those involved have mostly themselves to blame for the way it all went down – regardless of any potential deal making with Napster.
Hey Xavier – thanks for reading the post. Actually, Sony Music had our own direct to consumer download site during this period, and Tower Records and a few other retailers carried it as a white label service selling sdownloads to consumers. And several of the other majors had deals with Liquid Audio and A2B, to name two. The bullshit media narrative that we were doing nothing to compete with Napster ignores this fact completely.
The fact is, retailers were very prickly about labels selling downloads direct to consumers, as they viewed it as competitive. And the distribution/sales people within the labels were justifiably cautious about risking these relationships and creating friction over downloads, when these customers were generating BILLIONS of dollars for the labels annually.
Also, as I mention in the piece, labels had to clear the individual tracks for download. It was never intended that tracks would be broken off individually from albums and sold as “singles”, which had different contractual terms than albums. So publishers needed to be negotiated with, and artists, and in some cases artists said no, I don’t want my catalog cherry picked. It was incredibly complex and of course, Napster didn’t have to deal with this because they didn’t get ANYONE’s approval.
Metallica sued people who took it upon themselves to distribute their music without any rights to do so, and I support that to this day. The artist should ultimately decide how their content is used, and they sign contracts with labels to manage this for them.
What you call shortsighted is actually the responsibility to honor legal agreements with artists & publishers, and to respect relationships with partners the industry had been doing business with for decades (retailers). It is easy to look back now and say we should have ignored all that, because you’ve got 15 years of perspective. But as I said in the article, I think we did the right thing fighting Napster, for if we didn’t, iTunes wouldn’t have existed, the industry would have shrunken much faster, and would be in a far more diminished state than it is today.
If you were there in the trenches at the time, you’d probably think differently about it.